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October 21, 2013

A modest brick building surrounded by parabolic dishes here (Columbus, OH) by the Scioto River sports three signs: WSYX, WTTE, WWHO. Federal law requires these television stations to have separate owners, and they do. But one company runs all three to a significant degree, in a type of arrangement that regulators allow but is drawing fire from critics of media consolidation as big broadcasters use it to expand their reach.

In the brick building, one general manager and one sales director run all the stations, which share operations staff. Most staff report to Baltimore-based Sinclair Broadcast Group Inc., which owns WSYX but runs many aspects of all three and collects most of their revenue. The two stations Sinclair doesn't own are controlled by former bankers to its chief executive, David Smith ; one was controlled by his mother until she died last year.

Federal Communications Commission rules tracing to the 1940s prohibit anyone's owning more than one TV station in a market like Columbus'. But Sinclair can run major aspects of all three because of an approach the FCC allowed 22 years ago that lets a company manage stations it doesn't own. Companies that outsource station management are sometimes called "sidecars." Sinclair is America's biggest station owner and operator, thanks in part to sidecar agreements. Gannett Co. and Tribune Co. have proposed to expand, in part, through sidecar agreements, which have become widespread in the industry. Sinclair says such agreements are vital in competing against the Web and other new suitors for viewer attention. "It's necessary for survival because of the evolutionary nature of the competitive ad-selling marketplace," says Mr. Smith, Sinclair's chief executive.

Opponents of media consolidation say broadcasters use sidecar agreements as loopholes that let them violate the spirit of FCC ownership rules, which the agency says promote "competition, localism and diversity." When one owner manages multiple stations in a market, they say, it reduces local-news quality and variety, and drives up pay-TV bills. The FCC allowed these agreements to help struggling stations reduce costs, not to help companies gain turf, says former FCC Commissioner Michael Copps, a consolidation critic. "This is a shell game and an end run around the media-ownership rules." The FCC, as part of its regular review of media-ownership rules, has asked for comment on its sidecar policy, an FCC spokeswoman says. Former FCC-Chairman Julius Genachowski, before he stepped down this spring, privately pushed for stricter rules for sidecar agreements, say people familiar with his proposals. Mr. Genachowski didn't respond to requests for comment. Some broadcasters have recently seen Justice Department inquiries for deals including such agreements. Anticonsolidation groups and cable operators have petitioned the FCC to block acquisition plans that include operating nonowned stations. And the Government Accountability Office has begun to study competitive effects of these agreements.

Under these arrangements, variously called "shared-services agreements" or "joint-sales agreements," the FCC allows stations to outsource combinations of ad sales, retransmission negotiations, programming and operations-provided they maintain ultimate control of the programming on their airwaves. The Columbus stations show how sidecar deals work. In the glass-encased lobby, side-by-side TV screens show programming from two of the stations. Fox and ABC news vans share the parking lot. The Sinclair-owned WSYX, an ABC affiliate, runs significant aspects of WTTE, a Fox affiliate owned by Cunningham Broadcasting Corp. Sinclair's WSYX news anchors here also appear on WTTE newscasts. "We share our news backroom and reporting talent," says Sinclair Chief Financial Officer David Amy. He says the structure boosted news viewership and that "the beneficiaries of that have been the viewers."

Sinclair keeps WTTE's ad revenue and retransmission fees while providing "programming, sales and managerial services," and it provides programming and commercials on WTTE for all but two hours a week, FCC filings show. Sinclair reimburses Cunningham for WTTE's expenses and pays it a fee for the agreement. Carolyn Cunningham Smith, the Sinclair CEO's mother, had voting control of Cunningham until she died last year. Cunningham has applied to transfer voting control to a former banker to Mr. Smith, Michael Anderson, who says he has effective voting control while the request is pending. Under its agreement with Manhan Media Inc., WWHO's owner, Sinclair provides ad sales, administrative and operational functions, technical services and contract negotiations, filings show. Sinclair keeps most of WWHO's revenues. Sinclair reimburses WWHO's expenses, including salaries and benefits for the two employees that FCC rules require a station have on staff. Manhan is controlled by Stephen Mumblow, a former banker to Sinclair's Mr. Smith who later went into broadcasting. Mr. Amy says most staff running the stations report to Sinclair.

Sinclair has used similar sidecar agreements as it expands nationwide. Including pending deals, it has agreed to run 45 stations it doesn't own, in addition to the 118 it will fully own. Sinclair's critics say its use of sidecars blazed a trail. "The fact that the FCC didn't crack down on Sinclair is an indication to the rest of the industry that it's a model it can exploit," says Craig Aaron, CEO of Free Press, an anticonsolidation advocacy group. The Justice Department this year reviewed Sinclair's plan to sell WSYT in Syracuse, N.Y., to Cunningham to meet FCC ownership limits. The review led Sinclair to abandon the deal, Sinclair and Cunningham executives say.

In September, the American Cable Association, Free Press and Jesse Jackson's Rainbow PUSH Coalition asked the FCC to block all or parts of Sinclair's $985 million agreement to buy Allbritton Communications Co.'s eight TV stations, objecting to Sinclair's plans to sell some overlapping stations to buyers close to Sinclair. The FCC's response is pending. Sinclair declined to comment on the matter. Sinclair plans to sell the stations to Deerfield Media Inc. and Howard Stirk Holdings LLC, which, like Cunningham, are sidecar companies that almost exclusively own stations that Sinclair helps run. Deerfield is owned by Mr. Mumblow.

This month, Sinclair said it received a so-called second request for information from the Justice Department on station deals in two markets-part of its Allbritton acquisition-where advocacy groups objected to sidecar arrangements. Sinclair and Allbritton declined to comment on the request. Advocacy groups and pay-TV concerns such as Time Warner Cable Inc. and DirecTV Group Inc. petitioned the FCC to block some station transfers in Gannett's $1.5 billion agreement to buy Belo Corp.'s 20 stations and Tribune's $2.7 billion agreement to buy Local TV LLC's 19 stations, alleging that they were using "shell" companies to skirt ownership limits. Belo declined to comment. Gannett and Belo said in August that the Justice Department made a second request for information on their deal. Gannett and Tribune spokesmen say their deals meet FCC rules.

Sinclair's Mr. Smith says that FCC ownership rules are "crystal clear" and that Sinclair obeys them. "I can walk right up to that line and look right at that line," he says. "I have no hesitation about doing that-philosophically, intellectually or otherwise." The sidecar debate is riding a consolidation wave in broadcast TV, in which a half-dozen owners have committed most of the $10 billion involved in broadcast-TV acquisitions in the past year and a half, according to SNL Kagan, a research concern. Driving the consolidation are growing fees that cable and satellite-TV companies must pay to carry broadcasters' signals. A broadcaster that runs more stations has more muscle to negotiate these fees. Another driver: the tech onslaught. Local television remains Americans' primary news source. But local-TV viewership among adults under 30 fell to 28% in 2012 from 42% in 2006, according to Pew Research Center.

Sinclair's Mr. Smith says broadcasters compete with Web, cable, satellite and phone companies in ways that FCC rules never anticipated. Deals with nonowned stations level the playing field somewhat, he says. Running more stations lets Sinclair reduce costs by eliminating overlapping jobs and facilities, says Mr. Amy, Sinclair's CFO. Sinclair also gets more clout in negotiating programming-licensing deals and retransmission fees. Wall Street has cheered the consolidation, which helped Sinclair's revenue grow 26% in its 2013 first half, driving its stock price up nearly threefold this year. Mr. Smith and his brothers founded Sinclair in 1986 with a strategy that would turn the Baltimore TV station their father started into a consolidating force. An obstacle: From television's early days, the FCC let a broadcaster own only one station in a market.

Sinclair found a work-around. In 1991, it borrowed an arrangement the FCC already allowed to help struggling radio stations: One station could run significant aspects of another in a market without owning it. The FCC reviewed Sinclair's plan and allowed it to proceed. That let Sinclair, which owned a Pittsburgh station, WPTT, buy a stronger one there and sell WPTT to its former general manager, Eddie Edwards. Sinclair continued to run the station. "When David sees change taking place in the industry, he's one of those guys who takes full advantage of it," Mr. Edwards says of Mr. Smith.

A few years later, Sinclair wanted to buy a group of stations in Baltimore, Milwaukee and Birmingham, Ala., which partly overlapped with its holdings. Mr. Edwards and Mr. Smith's mother formed Glencairn Ltd., which bought stations in two of those markets and turned their operation over to Sinclair. Mr. Edwards owned the voting stock, and Ms. Smith owned most of the nonvoting stock, filings show. Ms. Smith later transferred the majority of Glencairn's nonvoting stock to a trust benefiting her grandchildren. In 1999, the FCC relaxed ownership rules to let an entity own two stations in some larger markets. That let Glencairn apply to transfer many stations it owned, or had agreed to buy, to Sinclair. Glencairn later transferred voting control to Ms. Smith.

In 2001, PUSH argued that Sinclair illegally controlled Glencairn. The FCC ruled that "Sinclair exercised de facto control over Glencairn" in violation of the Communications Act, but determined it wasn't likely such violations would continue, given Ms. Smith's assumption of control from Mr. Edwards. It allowed the acquisitions, fining Sinclair and Glencairn $40,000 each. The FCC cited, among other things, Mr. Edwards's inaccurate memory of some financial details, which Mr. Edwards calls "an oversight." Sinclair's Mr. Amy declined to comment on the matter. Glencairn later changed its name to Cunningham, a family name with rich resonance for Mr. Smith. Among his holdings is a group of Baltimore restaurants that get supplies from his Cunningham Farms, located on a 200-acre estate, Cunningham Manor. Mr. Smith says Sinclair has no operational control over Cunningham Broadcasting. "We have a business relationship with them. We sit down and negotiate stuff that we need to negotiate. But otherwise I have no interest in it," he says.

Mr. Anderson, Cunningham's president, agrees, saying Cunningham maintains ultimate control. But he says he listens to Sinclair's programming advice. "They certainly are a smart company, and they certainly have a lot more experience." Sinclair guaranteed loans for Cunningham's acquisitions, filings show-something FCC rules allow. Sinclair owns most assets at Cunningham stations, such as buildings and equipment, other than the broadcast licenses. Sinclair has options to buy those stations, should ownership rules change. It consolidates Cunningham's results in its financial statements.

Sinclair is similarly intertwined with Manhan and Deerfield, owned by Mr. Mumblow. Mr. Mumbow says he named them after rivers near his Christmas-tree farm but declines to discuss their business relationships with Sinclair. Deerfield owns, or has agreed to buy, 12 stations Sinclair helps run. Sinclair guarantees Deerfield's debt and consolidates Deerfield's results on its balance sheet, filings show. Among Sinclair's recent sidecar deals is with Howard Stirk Holdings, owned by conservative commentator Armstrong Williams. It agreed this year to buy three stations Sinclair would run. Sinclair is guaranteeing the deals' financing.

Mr. Williams, an African-American, praises Sinclair for giving minorities the opportunity to own stations. "There is a closeness between Howard Stirk and Sinclair because David Smith is one of my best friends in the world," he says. Relations were too close in one case. When Sinclair this year had to divest WSYT, the Syracuse station, it hoped to sell to Howard Stirk, Mr. Williams says, but the Justice Department "said it wouldn't work," because "it would still be like a duopoly." Sinclair also abandoned efforts to sell WSYT to Cunningham, choosing another buyer after Justice Department resistance, says Cunningham's Mr. Anderson. "They were not comfortable yet," he says, "and in the interest of time, Sinclair went to Plan B." Wall Street Journal